The Federal Housing Finance Agency (FHFA) has introduced a plan that helps address the liquidity gap that Fannie Mae and Freddie Mac mortgage servicers face as a result of a flood of forbearance requests resulting from the coronavirus pandemic.
The recently passed CARES Act requires mortgage servicers to provide forbearance plans – including reduced payments or delayed payments for up to 12 months – for borrowers who are struggling due to job loss as a result of the economic crisis caused by the pandemic.
Since early April, servicers have been inundated with forbearance requests as a result of the CARES Act – however, the Act fails to address the need for a liquidity facility to help Fannie and Freddie servicers cover the billions in missed payments they must continue to make to bond holders.
(In March, Ginnie Mae instituted a special program that solves for this issue for its servicers.)
In March and April, a coalition of industry groups, including the Mortgage Bankers Association, lobbied the federal government for the creation of a liquidity facility for Fannie and Freddie servicers to help cover the looming gap, but Mark Calabria, director of the FHFA, said there would be no liquidity facility forthcoming – at least, not in the short term.
But now, the FHFA has introduced a plan that relinquishes mortgage servicers from having to make payments to investors after four months of missed payments on a loan.
“Once a servicer has advanced four months of missed payments … it will have no further obligation to advance scheduled payments,” the FHFA says in a release. “This applies to all [Fannie and Freddie] servicers regardless of type or size.”
“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Fannie- and Freddie-backed housing finance market,” Calabria says. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”
According to the release, Freddie Mac servicers were already only obligated to advance four months of missed borrower interest payments.
“Today’s instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac,” the FHFA says.
The agency has also directed Fannie and Freddie to “maintain loans in COVID-19 payment forbearance plans in mortgage backed security (MBS) pools for at least the duration of the forbearance plan.”
In a statement, Robert Broeksmit, CMB, president and CEO of the MBA, says the FHFA measure “is an important step in reducing the maximum liquidity demands for servicers who are providing mortgage payment forbearance for borrowers who have a pandemic-related hardship.”
However, Broeksmit says a liquidity facility is still needed.
“This change limits the length of time that a servicer would need to advance principal and interest payments, but servicers are still responsible for advancing payments for property taxes, homeowners insurance, and mortgage insurance if the borrower does not pay them separately,” Broeksmit says. “While this news reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it in order to continue to make payments to investors, municipalities, and insurers on behalf of borrowers who have been granted forbearance required under the CARES Act.”
John Ryan, president and CEO of the Conference of State Bank Supervisors, says while the FHFA’s plan is an important first step – it is only a first step.
“[The] FHFA’s commitment to provide partial support to GSE mortgage servicers during this unimaginable national challenge is an important step, but only a first step,” Ryan says in a statement. “Additional efforts are needed to ensure servicers are able to provide the support to consumers promised by Congress.
“The GSE servicers will continue to have to fund significant obligations,” Ryan adds. “In addition, the GSE servicers are one slice of the nonbank market. State regulators maintain the call for the Federal Reserve and Treasury to establish a credit facility as a backstop to ensure servicers have access to predictable and reliable funding to avoid breakdowns in the mortgage finance system.”